If you’ve been considering an FHA loan but feel unsure about your qualifications, you’re not alone! This is a common concern for many prospective buyers, particularly if you have a lower credit score or higher debt-to-income (DTI) ratio.
However, there’s good news: FHA compensating factors could help you qualify even if your financial profile isn’t perfect. Think of them as a safety net that allows lenders to see the bigger picture of your financial stability. When reviewing your loan application, underwriters look at these factors to determine whether you can responsibly manage a mortgage, even if some aspects of your credit or debt-to-income ratio aren’t ideal.
A strong savings history, a solid down payment, or consistent income are all compensating factors that can work in your favor. These indicators reassure lenders that you have the financial discipline to handle a loan, making it possible to get approved despite a few red flags.
In a nutshell
FHA compensating factors can help you qualify for an FHA loan even if you have a low credit score or a high DTI ratio.
These factors are usually reviewed during manual underwriting, where lenders have more flexibility.
Underwriters take into account your overall financial health to help you qualify.
To fully understand how compensating factors work in your favor, you need to learn a bit about the FHA loan underwriting process.
The FHA Underwriting Process
Securing an FHA loan involves a thorough review of your financial situation, which is broken down into two main steps: automated underwriting and manual underwriting. First, lenders run your application through an automated underwriting system or AUS. These computerized systems differ by loan type, and the one used in FHA approval is called TOTAL or Technology Open To Approved Lenders.
While not a guarantee of AUS automatic approval, you typically need the following qualifications:
580+ credit score (though most lenders require 620+)
No foreclosures, short sales, or deed-in-lieu within the last 3 years
No bankruptcies within the last year (chapter 13) or two years (chapter 7)
A debt-to-income ratio of 43% or lower
Two years of stable employment and income
If the system flags any issues, your application moves to manual underwriting. This is where FHA compensating factors come into play. Lenders understand that no borrower is perfect, which is why they have human, aka manual underwriters, who work to offer flexibility beyond AUS’ strict qualifications.
Unlike automated systems, manual underwriters consider a broader range of factors, including compensating factors demonstrating your ability to manage the loan. This is where the real advantage of manual underwriting shows up: while automated approvals are fast, they’re more rigid.
FHA Compensating Factors Chart
To give you a clearer picture of how FHA compensating factors are evaluated during the manual underwriting process, check out this quick overview with examples:
| Credit Score | Max Ratios (PTI/DTI) | Required Compensating Factors |
|---|---|---|
| 500–579 or No Score | 31/43 | Not allowed to exceed 31/43. No compensating factors accepted. |
| 580+ | 31/43 | No compensating factors required. |
| 580+ | 37/47 | One of the following: Verified cash reserves, minimal increase in housing payment, or residual income. |
| 580+ | 40/40 | Must have no discretionary debt |
| 580 | 40/50 | Two of the following: Verified cash reserves, minimal increase in housing payment, residual income, or significant additional income (not in Effective Income). |
Quick Definitions of Compensating Factors
Verified Cash Reserves: 3 months of full mortgage payments for 1–2 units; 6 months for 3–4 units (after deducting funds used to close, gifts, or borrowed funds).
Minimal Increase in Housing Payment: New payment increases no more than $100 or 5% (whichever is less) over current housing payment. Requires 12 months of solid housing history.
No Discretionary Debt: Only debt is housing; all other accounts are paid in full monthly for at least 6 months and open for 6+ months.
Significant Additional Income (Not in Effective Income): Must be consistent (1+ year history) and would reduce qualifying ratios to ≤ 37/47 if included.
Residual Income: Must meet or exceed VA residual income guidelines based on family size, region, and loan amount. Must be calculated per VA method.
Energy Efficient Homes (EEH): May allow stretch ratios (33/45) for qualifying properties with proper documentation.
Factors for FHA Energy Efficient Homes (EEH)
Borrowers buying energy-efficient homes may qualify for slightly higher debt-to-income ratios, up to 33/45, even without compensating factors, if the home meets certain standards.
Qualifying Homes Include:
New construction built to HUD or local/state energy codes.
Manufactured homes labeled ENERGY STAR.
Existing homes scoring a 6 or higher on the Home Energy Score scale, or homes that would reach a 6+ after recommended energy upgrades (when those upgrades are completed prior to closing).
Documentation Required:
New construction: Builder’s certification (HUD-92541) or manufacturer’s invoice.
Existing homes: Home Energy Score Report or ENERGY STAR label photo.
The Bottom Line
FHA compensating factors can make all the difference for borrowers who don’t meet traditional lending benchmarks. By demonstrating financial stability through strong savings, steady income, or other favorable indicators, you can improve your chances of loan approval, even with a few red flags. If your application doesn’t get automatic approval, these factors may still help you qualify through manual underwriting.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
